IndusInd Bank Shares Decline On CEO's Lower-Than-Expected Term Extension

IndusInd Bank's chief executive officer term extension could lead to short-term volatility, but fundamentals are stable.
<div class="paragraphs"><p>An IndusInd Bank branch in Bengaluru. (Photo: BQ Prime)</p></div>
An IndusInd Bank branch in Bengaluru. (Photo: BQ Prime)

Shares of IndusInd Bank Ltd. declined 6.4% after the banking regulator approved a two-year extension to Managing Director and Chief Executive Officer Sumant Kathpalia.

The bank's board had approved a fresh three-year term for Kathpalia in September 2022. While analysts noted that the stock might see some volatility due to the lower than expected term, the fundamentals at the bank continue to remain strong.

"We continue to see strong potential for revenue growth acceleration and credit cost moderation at IndusInd, which can drive re-rating as well over the next few years. Near term, the lower than expected tenure extension could drive some volatility in the stock," Morgan Stanley said in a note late Sunday, adding that the brokerage continues to remain 'overweight' on the stock.

There have been instances where the tenure extension has been just one year, and subsequently, either the tenure is not extended, like in RBL Bank, or the tenure has been extended to three years, like in Federal Bank.

It is not clear why the RBI chose to extend Kathpalia's term by only two years.

The lower than expected term extension could be considered as a reflection on need for better controls at IndusInd Bank, along with improvements on liabilities and underwriting, according to Jefferies.

"We trim loan growth by 100 basis points for FY24–25 to factor flexibility to improve deposit mix," Jefferies said. "We still see a 20% CAGR over FY23–25 in loans and a turnaround in earnings and return on equity of 16%. The common equity Tier-1 capital adequacy ratio is adequate at 16%," Jefferies said.

At 11:30 AM, Shares of the private lender were trading at Rs 1,071.85 per share, down 6.37% from Friday's close, while the benchmark Nifty 50 declined 1.10%.

Of the analysts tracked by Bloomberg, 43 have a 'buy' rating, seven are calling to 'hold' the stock, and one recommends 'sell', according to Bloomberg.

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